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Who Will Make Our Devices in the Future?

We’re generally uninterested in the partisan sniping that marks much of the discussion of Apple’s place in the technology world’s competitive landscape, but it’s worth taking a look at just who competes with Apple these days and what the future might hold, given the industry-wide trends that have contributed to a drop in computer sales, the rise in shipments of smartphones and tablets, and the retreat from the consumer market by major PC makers.

Despite slowing growth, Apple is still extremely profitable, and, as such, has the challenge of what it can do next that will be as exciting as the last thing (see “Apple Q2 2013 Results Show Higher Revenues, Lower Profits,” 23 April 2013). The company remains the undisputed leader in tablet sales, a significant force in smartphones (netting two-thirds of the profit even with less than a quarter of the sales), and a slowly declining presence in computers. Interestingly, Apple’s Mac sales still garner the company a large percentage of the global computer market profit — as much as 45 percent, according to Horace Dediu’s
analysis at Asymco. (In terms of units sold, Apple has a 10 percent share of the computer market in the United States, and a couple percent worldwide.)

But predicting who will continue to compete with Apple becomes more difficult when you look at the sales and future of nearly every other major player in the technology industry.

PC: Pretty Catastrophic -- The iPad sucked the life out of netbook sales, which were an attempt by PC makers to remain relevant during an economic slowdown by selling inexpensive (but underpowered) computers. Cheap netbooks and laptops are still available, but the iPad, joined later by tens of millions of tablets sold by Samsung, Amazon, ASUS, and others, seemed to fill that need more neatly.

The latest quarter of PC sales, however, showed that netbooks weren’t the only computer models to suffer. Overall sales dropped sharply in nearly all markets in the world, according to IDC. In the last quarter, only 76 million desktop and laptop computers were sold worldwide, a plunge of over 13 percent over the same period a year earlier. One can criticize Windows 8, as IDC did, for not provoking enough excitement for people to buy new PCs, but the problems go deeper.

People and businesses don’t need to refresh computers as often as they used to. Newer machines are sufficiently powerful to remain useful longer, since primary productivity apps no longer tax the CPU power of modern machines. Tablets and smartphones are also powerful enough to take over from computers for many tasks, sucking sales away from the computer makers. Then there’s the huge installed base of corporate users mired in an unholy muddle of Windows XP, Internet Explorer 6, and ActiveX for in-house developed apps — such companies have a daunting upgrade path, and they keep postponing the pain as long as they can extract utility out of systems developed a decade ago.

In the PC world, HP, Lenovo, and Dell may still be the biggest brand names, sharing 43 percent of the market between them, but the “Others” category sells just as many computers, largely off-brand and white-box commodity PCs sold into developing markets.

HP continues its multi-year management crisis with seemingly no end in sight, while Dell founder Michael Dell is still trying to assemble the financing necessary to take the company private. Both firms have pinned their futures on consulting and services divisions, not consumer sales. Lenovo held its sales steady with a precisely 0-percent change year-over-year, down to one decimal point. Lenovo may wind up being the world’s biggest computer brand by default, as making computers is its primary business since it purchased IBM’s personal computer line. (It may buy IBM’s low-end server division next.)

Worse, three of the top four PC makers — HP, Dell, and Acer — have essentially no tablet sales and no presence in smartphones. The number two firm, Lenovo, sells a fair number of smartphones, and number five, ASUS, has a modest tablet business.

With the triumvirate of falling PC sales, an increasing share of the pie going to the “Others” category, and brand-name manufacturers withdrawing from the consumer market (and taking their marketing budgets with them), these giant firms will command ever less of a place in the general discourse of the technology world. Consumers — particularly in the developing world — will increasingly buy commodity PCs to run Windows (with a smaller number relying on Linux variants), and the cycle will feed back on itself to further reduce PC sales numbers.

This obviously affects Intel. The company has a diversified business, but more than two-thirds of its revenue comes from the PC market. Intel is rapidly trying to push its mobile technology by helping PC makers produce cheaper and faster laptops, and by coming up with tablet and smartphone chips. However, ARM owns the vast majority of the market for mobile device processors, including Apple’s iOS devices and most Android-based tablets and smartphones. Unlike Intel, which manufactures and sells chips, ARM designs and licenses chips, making ARM fleeter and giving it higher margins (53 percent profit in its most recent quarter!).

We’re not going to forget any of these companies, but with the exception of Intel — which may make a real run at mobile — we’re quickly going to care less about many of them.

Smart(phone) Moves -- The smartphone world has shaken out to two major players: Apple and Samsung, who divide 98 or 99 percent of the profit between them. All other smartphone makers are losing money or earning a pittance. Motorola may find a foothold, thanks to being owned by Google, and Nokia has fallen behind only Samsung in the overall mobile phone market share (which include so-called “feature phones”), but it’s ever more unlikely that either will garner more than a tiny part of the smartphone market.

In the fourth quarter of 2012, the latest for which all companies’ figures are available from analysts, Gartner estimated that Samsung sold more than 40 percent of all Android phones in the world, or about 63 million units (compared to Apple’s 48 million iPhone sales). The analysis firm Canalys broke that down: the next biggest smartphone makers after Apple and Samsung are Huawei (12 million units), ZTE (10 million), and Lenovo (10 million).

The tablet market is even more distorted. Apple and Samsung own it. IDC noted in its fourth quarter 2012 report that Apple had 44 percent of global sales (23 million units) and Samsung had 15 percent (8 million units). Amazon brings up the rear with 6 million Kindle Fire models that run a version of Android.

The real point of interest, of course, is Samsung’s relationship with Google. Google may have purchased Motorola’s handset division as a better way to produce reference designs that other smartphone makers would have to match, thus producing better overall Android options. Microsoft did this by proxy, by investing in Nokia and underwriting Nokia’s shift from the long-developed Symbian smartphone OS to Windows Phone.

But how long does Samsung need to stick with Google’s official versions of Android? Because Android is licensed on an open-source basis, Samsung can fork (make its own version using all the source code) at any point. Google provides its services and the Android name only to smartphone and tablet makers that toe the line. There are thus many “Android” phones and tablets sold in China and elsewhere that rely on the base operating system, but have no Google features. Amazon (with the Kindle Fire) and Barnes & Noble (with the Nook) are the best known examples of this in the United States, both running a version of Android that intentionally eschews Google’s apps, services, brand name, and restrictions.

With a little bit of math, one can extract from the Canalys report that 56 million smartphones (26 percent) sold were what analysts call “OHA devices.” The Open Handset Alliance is the group that ostensibly manages the Android OS, but is really run by and for Google. Most of these aren’t Google-certified Android smartphones. (Take the 75 million phones in the “Others” category and subtract numbers sold by OS except Apple and Android. That gets you 56 million. Confirm my math by taking the number of phones sold by the top four Android makers and add 56 million and you get the 150 million OHA total.)

The same is true (and easier to calculate) in the IDC tablet report: 12 million tablets (22 percent) were “Others,” almost assuredly running some flavor of Android without being labeled as Android. (Sales of Microsoft’s Surface tablets aren’t yet above a rounding error.)

Samsung recently partnered with Mozilla — which is developing its own Firefox mobile operating system — on a new, more-secure programming language (Rust) and an experimental browser engine (Servo) written in that language. This could be the first step in Samsung taking its profitable hardware business to a software platform it can fully control, and where it can reap mobile advertising profits along with revenues from additional for-fee services. Should Google turn Motorola into a profitable division, that would give Samsung even more motivation to go its own way. (I explain where browser engines come in at
greater length in a recent TechHive article.)

Left Standing? -- If you’re keeping a scorecard, the question is: Which companies will be left standing and worth paying attention to? Clearly, one of the answers is “none of the big names above.” The white-label and minor brands that are selling tens of millions of computers, smartphones, and tablets, have a substantial collective share of the markets, and indications are that their share will continue to grow.

Apple, certainly, will be on the minds of TidBITS readers, but even its dip in profit margins (lower earnings on higher revenue) in its last fiscal quarter isn’t a significant concern for the next few years. The trend away from computers and toward tablets and smartphones plays into Apple’s strengths.

Having emerged as the only company that can both ship a lot of hardware and turn substantial profits, even with lower margins than Apple’s, Samsung is worth watching closely. Say what you will about particular models of its hardware, Samsung is providing an alternative that people seek out, even if its devices cost the same or more than Apple’s. Samsung could be modeling itself after Apple by moving away from Google-branded Android and making its own operating system.

After “Others,” Apple, and Samsung, things get murky. Microsoft will continue to play a role as the provider of Windows, but it may largely be serving that unruly pack of off-brand PC makers mentioned above. While a defection from Samsung could be harmful, Google might also try to become a more-significant hardware manufacturer on its own through Motorola, or it might attempt to bring more of the “Other” manufacturers into the official Android camp. And Lenovo shouldn’t be counted out, given its position in the PC market and niche in the smartphone market.

However, many other familiar names, such as HP and Dell, may be going the way of IBM, once a common logo on personal computers. And while Intel certainly isn’t giving up easily, ARM presents a formidable challenge as the world goes mobile.

It’s hard to imagine such giant companies falling by the wayside, perhaps because their demises seldom make a great noise. Instead, they mostly fade into irrelevance, become acquisition prey, or slink off to different markets. But disappear from the market they do, and new players continually rise up to take their places.

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